Written by Convera’s Market Insights team
Job ambiguity leaves room for guessing
Boris Kovacevic – Global Macro Strategist
The US economy has added more jobs than expected in February, with nonfarm payrolls rising by 275 thousand versus the consensus number of 200 thousand. However, the strength of the headline number got tamed by various details of the report. (1) The unemployment rose from 3.7% to 3.9% to a two-year high and (2) the January job growth was revised down from 317 thousand to 177 thousand. The downside bias on the revisions side has continued as 10 out of the last 12 months have been revised down.
We see the report as overall risk positive as it confirms the still orderly moderation of the labor market. Still, the ambiguity of the labor market leaves room for different interpretations, which becomes clear looking at Friday’s market rection. The US dollar gave way to selling pressure immediately after the report but recovered all its losses before the weekly close. The Greenback couldn’t avoid recording its worst week this year, after Jerome Powell and other labor market data pushed up bets on Fed cuts this year slightly.
This week’s macro data disappointments and a plethora of institutional forecasts seeing inflation move back close to the 2% target in Europe and the United States this year have been welcomed news for markets, which are continuing to bet on central banks delivering rate cuts this year. While the easing expectations have been pared back in recent months, the monetary policy cycle has already turned more accommodative, supporting risk assets across the globe. Fed Chair Jerome Powell and ECB president Christine Lagarde did push back against premature easing this week. However, both central bankers confirmed the base case of cutting interest rates this year, sending positive ripples through markets. While January and February were about falling easing bets, March is shaping up to be about putting those bets back into pricing.
The outperformance of the US economy has been a major macro theme impacting market pricing over the last years. We are now starting to see some cracks emerge in the US economy’s armour as leading indicators are starting to turn more negative. The upcoming data will be key to gauge where we are within this theme and our confidence to call the end of US exceptionalism. The first test will come in the form of the US CPI report. Last month saw consumer prices rise by 0.4% in what a solid upside surprise has been. We are expecting a moderation of both the monthly and yearly inflation print as one-off effects from January subside. Investors will also keep an eye on retail sales, industrial production, and the producer price index, which are all coming up after the CPI print next week.
Proud pound faces wage growth test
George Vessey – Lead FX Strategist
The British pound rose to its highest level in seven months against the US dollar, just shy of $1.29 and closed the week just above its 200-week moving average – a level that’s acted as a key resistance barrier for the best part of two years. GBP/EUR also came just 20 pips away from hitting its highest level since early September 2022, supported by elevated global risk appetite and low cross-asset volatility on rising rate cut bets and an improving UK growth outlook.
The pound has outperformed most of its peers – appreciating against over 90% of the world’s global currencies so far this month compared to just 32% of its peers last month. In fact, year-to-date, sterling is beating more than 90% of the world’s currencies, reflecting renewed confidence in the UK’s economic outlook. Bets that the Bank of England (BoE) will keep interest rates higher for longer, providing the pound an attractive yield appeal, have also proved constructive. As we’ve been warning for some time though, the biggest risk to the pound in our view is positioning, because there’s an overcrowded bet on sterling appreciating in the future. Net long GBP bets are near 15-year highs and significantly more than 1 standard deviation higher than their historic average. However, with GBP/USD breaking out above its narrow 3-month trading range, a retest of $1.30, which last traded in July 2023, could soon be on the cards.
Aside from positioning though, sterling will also have to stand the test of data to confirm the view that the BoE will be the hawkish outlier. The UK employment and GDP reports on Tuesday and Wednesday will be closely watched by market participants. In the employment report, UK wage growth data is top on the radar, because alongside services inflation, this is critical to the BoE’s decision on when to cut rates. An upside surprise could be the catalyst to support sterling even higher.
ECB to cut four times as inflation falls to 2%?
Ruta Prieskienyte – FX Strategist
Euro had its best week since mid-December against the US dollar, rallying to a 7-week high, as investors digested ECB’s March rate decision and dovishly-perceived Powell congressional testimony. EUR/USD posted the largest weekly gain (+1.2%w/w) over the past 10 weeks, reversing over half of its January losses, as a slide in US yields further tightened German-US spreads, further eroding dollar’s yield advantage.
In last week’s rate decision, the ECB keep its rates unchanged at 4% as the core message remained unchanged: the borrowing costs will remain elevated for as long as necessary. Lagarde signalled June as the most likely time for rate cuts, an objectively dovish remark, but continued to link monetary easing with developments not only in inflation but also wages. Although slowing, 4% y/y wage growth is still too high for the ECB’s comfort, particularly given the feeble productivity growth in recent quarters. The Governing Council needs to see more concrete evidence of easing labour market pressures before unwinding the ultra-tight monetary policy stance. Elsewhere, latest data from Germany, while largely ignored by the markets, hinted at signs of recovery. The latest industrial production print for January gained by 1.0% m/m, up from -2.0% in December – the first expansion in nine months. There are signs that the sick man of Eurozone is bottoming out, but the numbers still point to another economic contraction in Q1 and a long road to recovery ahead. Industrial production remains over 5% lower than a year ago and around 10% below its pre-pandemic level.
Looking ahead euro’s bullish rally faces a psychological resistance barrier at $1.09500, with the RSI now firmly in overbought territory. EUR/USD is likely to surrender some of the gains and depreciate towards $1.09 handle – the level above which it has traded only 24% of the time in 2024.
Pound surges 1.6% to a 7-month high
Table: 7-day currency trends and trading ranges
Key global risk events
Calendar: March 11-15
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*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
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